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“Jane Bryant Quinn is America’s dean of personal finance....The book is a true treasure chest of financial secrets.” —Forbes
With How to Make Your Money Last, you will learn how to turn your retirement savings into a steady paycheck that will last for life.
Today, people worry that they’re going to run out of money in their older age. That won’t happen if you use a few tricks for squeezing higher payments from your assets—from your Social Security account (find the hidden values there), pension (monthly income or lump sum?), home equity (sell and invest the proceeds or take a reverse mortgage?), savings (should you buy a lifetime annuity?), and retirement accounts (how to invest and—critically—how much to withdraw from your savings each year?). The right moves will not only raise the amount you have to spend, they’ll stretch out your money over many more years.
You will also learn to look at your savings and investments in a new way. If you stick with super-safe choices the money might not last. You need safe money to help pay the bills in your early retirement years. But to ensure that you’ll still have spending money 10 and 20 years from now, you have to invest for growth, today. Quinn shows you how. At a time when people are living longer, yet retiring with a smaller pot of savings than they’d hoped for, this book will become the essential guide.
With How to Make Your Money Last, you will learn how to turn your retirement savings into a steady paycheck that will last for life.
Today, people worry that they’re going to run out of money in their older age. That won’t happen if you use a few tricks for squeezing higher payments from your assets—from your Social Security account (find the hidden values there), pension (monthly income or lump sum?), home equity (sell and invest the proceeds or take a reverse mortgage?), savings (should you buy a lifetime annuity?), and retirement accounts (how to invest and—critically—how much to withdraw from your savings each year?). The right moves will not only raise the amount you have to spend, they’ll stretch out your money over many more years.
You will also learn to look at your savings and investments in a new way. If you stick with super-safe choices the money might not last. You need safe money to help pay the bills in your early retirement years. But to ensure that you’ll still have spending money 10 and 20 years from now, you have to invest for growth, today. Quinn shows you how. At a time when people are living longer, yet retiring with a smaller pot of savings than they’d hoped for, this book will become the essential guide.
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About the Author:
Jane Bryant Quinn is a leading commentator on personal finance. She is author of the bestselling Making the Most of Your Money NOW, Smart and Simple Financial Strategies for Busy People, and Everyone’s Money Book. Quinn has written for Newsweek, The Washington Post, Bloomberg, Woman’s Day, and Good Housekeeping. An Emmy Award winner, Quinn’s own program ran on PBS. She has also been a regular correspondent for the CBS Morning and Evening News. Her personal finance column currently appears in the AARP Bulletin. She lives in New York City and blogs at JaneBryantQuinn.com.
Excerpt. © Reprinted by permission. All rights reserved.:
How to Make Your Money Last Introduction
I started this book because my head was popping with questions about the life phase we call “retirement.” After decades of working, we’re finally free—but free to do what? A whole generation is reinventing itself as it moves away from the role of earner toward the new status of “engaged and interested citizen, retired.”
As we gradually find our footing, we’re also trying to find a way of paying for it. None of us knows how many years we have ahead—20? 30? More? Last year, my family celebrated my mother’s 100th birthday. (She’s sharp and happy, thank you for asking!)
Centenarians are rare but our lengthening life expectancies continue to surprise us all. On average, you’ll reach your mid- to late-80s. The 90-plus population has tripled over the past three decades. We have every reason to worry that our money will run out before we do. Many of us are staying on the job well past traditional retirement age, not just because we like the work but because we need our salaries, too.
The way you look at your finances changes as you move from preretirement to your postretirement years. While you’re still working, you focus on accumulating a satisfactory pile. You might have a dollar target in mind. More likely, you’re saving whatever you can, aiming every year for “more.” You’re paying down debt (I hope) and focusing on investments that can make your money grow.
That flips when you enter retirement’s door. Suddenly, you have to take the money you’ve saved and turn it into a reliable income for life. How large will that income be?
In a perfect world, you’ll work on this question well before you leave your job. The answer will tell you when (and whether) you can afford to quit. In this imperfect world, however, you might be pushed into retirement unexpectedly. You’ll need to figure out, pronto, how to manage with what you already have. Modest spenders can live on Social Security and, if they’re lucky, a pension, dividends, and interest. You might pick up some extra income from a temporary or part-time job.
Often, however, that’s not enough to pay the bills. You’ll have to supplement your income with regular withdrawals from your savings and investments. These withdrawals amount to “homemade paychecks,” landing in your bank account just the way your working paychecks did. If you’re married, the paychecks have to cover the cost of two life spans as well as any emergency need for cash. What kind of standard of living can you afford? Will you have to keep working? And how do you stretch your savings to make the money last?
When I started asking those questions for myself, I looked around for information. There isn’t much. I found books and websites on how to invest but practically nothing on how to prudently parcel your money out. If you take too little from savings, you’re depriving yourself of some of the comforts that you worked for. If you take too much, you’ll go broke.
I did find plenty of bad advice from financial firms and their salespeople (a.k.a. “advisers,” “financial consultants,” and brokerage firm “vice presidents”). I was shocked when I looked at the menu of so-called “safe” and “guaranteed” investments we’re being offered. They’re loaded with hidden costs and risks. Maybe the firms are unscrupulous, maybe just careless. Either way, people like us—with savings that we need to both hoard and spend—are walking around with targets on our backs. We’re where the money is and, believe me, they’re coming for it, or trying to.
Fortunately, important and objective research is currently being done on ways of creating reliable incomes for life. I’ve spoken to the key players and gathered their findings here. What surprised me—really surprised me—is how simple a retirement income plan can be. So simple that you can manage the investments and withdrawals yourself. If you’d rather not, I found several new sources of high-level help at rock-bottom costs. You don’t have to pay big commissions and fees to get good advice.
I also learned a lot by talking with practically everyone I met about the retirement decisions they’re making for themselves. Often, they were leaving money on the table because they hadn’t heard about their alternatives. Social Security topped this list. I found people taking it at age 62—not because they had to but because it was there. They had no idea how much their monthly benefit would increase if they waited a few years to collect. If you’re married and each of you has a Social Security account, you can combine your benefits or adjust your claiming dates to collect even more.
Then there’s the question of what percentage of your retirement savings to put into stocks (or, rather, stock-owning mutual funds—the best bet for you and me). Some savers were so spooked by the near collapse of the financial system in 2007 and 2008 that they now invest only in bonds and insured certificates of deposit. But even if you can live on today’s low fixed-interest rates, what will that income be worth in purchasing power as the years go by?
There’s a lot of research linking the percentage you hold in stocks to the size of the sustainable income you can withdraw from your savings for life. Having read it, I’ve come to think of retirement as being split in half. For the first half—the near-term 10 years or so—holding safe or low-risk CDs or bond mutual funds makes a lot of sense. You need a reliable source of money in case stock prices decline. But to fund the second half of retirement—starting 10 or 12 years from now—you’ll need to own investments that grow. American and international business, as a whole, has succeeded wonderfully over time (with occasional hiccups). We can share in that growth without breaking a sweat by buying and holding just two or three well-diversified stock-owning mutual funds. When you do this, you’ll still be an “income investor.” Future capital gains create spendable income just as interest and dividends do.
For prudent cash withdrawals from your retirement savings, the standard advice has been to take 4 percent of the total in the first year and add an increment for inflation in each subsequent year. But 4 percent is too much if you own only bonds and CDs. And it’s perhaps too little when part of your money is invested for growth. You don’t have to make a wild guess about how much of your savings you can afford to spend. There are recipes. Who knew?
While working on this book I changed my mind about a few things. For example, I developed a new respect for immediate-pay annuities that convert a lump sum of savings into an income for life. They offer a higher monthly income than you can prudently withdraw from investments that you manage yourself. (Don’t confuse “immediate-pay” with the variable annuities that promise lifetime benefits. “Lifetime benefit” annuities are on my “no” list due to high costs and misleading sales. It’s all explained in Chapter 6.)
Another example—I learned a new use for reverse mortgages. These loans against home equity are often a poor deal for people in later age, especially for those who have almost run out of cash. But if you take the loan earlier, in the form of a credit line, you can use it to increase the size of your monthly income. The credit line grows every year, which gives you a nice hedge against potential inflation.
A homemade paycheck isn’t intended to cover everything. You need it only to fill the gap between your retirement expenses and your other sources of income, such as Social Security, pension, rents, part-time work, and whatever. Figuring out that gap is the entryway to retirement planning. Don’t feel bad if you have to trim your expenses so as not to take too much from your savings every year. Almost everybody trims whether they confess it or not. Peace of mind is finding a way of life that works.
Every personal situation is a little different. Some people focus their plans on retiring at a certain age—anywhere from 45 to “never.” Some get a buyout offer at 55 and wonder whether they can afford to take it. Some are pushed into retirement unexpectedly, through illness or job loss, and find that money is short. Some have retired already and need a clearer look (or a second opinion) on how to handle their money now. I’ve ranged over all the major financial questions I can think of, including health and life insurance. Inevitably, products and options will change in the future but, in my reporting, I sought general principles that will stand the test of time.
The biggest thing I learned, after digging into this subject for a couple of years, is the significance of our sense of self as we approach or enter this change of life. We need to find a new way of being—a fresh identity, different passions and pastimes, and a deeper involvement with family, community, and friends. We’re not on the shelf (yet!). We have lots to contribute and the time to find our place. What gives us this freedom of mind and action is having an income that we’re sure will last for life. This book was written to help you build it. After that, adventure calls.
Jane Bryant Quinn
New York City
I started this book because my head was popping with questions about the life phase we call “retirement.” After decades of working, we’re finally free—but free to do what? A whole generation is reinventing itself as it moves away from the role of earner toward the new status of “engaged and interested citizen, retired.”
As we gradually find our footing, we’re also trying to find a way of paying for it. None of us knows how many years we have ahead—20? 30? More? Last year, my family celebrated my mother’s 100th birthday. (She’s sharp and happy, thank you for asking!)
Centenarians are rare but our lengthening life expectancies continue to surprise us all. On average, you’ll reach your mid- to late-80s. The 90-plus population has tripled over the past three decades. We have every reason to worry that our money will run out before we do. Many of us are staying on the job well past traditional retirement age, not just because we like the work but because we need our salaries, too.
The way you look at your finances changes as you move from preretirement to your postretirement years. While you’re still working, you focus on accumulating a satisfactory pile. You might have a dollar target in mind. More likely, you’re saving whatever you can, aiming every year for “more.” You’re paying down debt (I hope) and focusing on investments that can make your money grow.
That flips when you enter retirement’s door. Suddenly, you have to take the money you’ve saved and turn it into a reliable income for life. How large will that income be?
In a perfect world, you’ll work on this question well before you leave your job. The answer will tell you when (and whether) you can afford to quit. In this imperfect world, however, you might be pushed into retirement unexpectedly. You’ll need to figure out, pronto, how to manage with what you already have. Modest spenders can live on Social Security and, if they’re lucky, a pension, dividends, and interest. You might pick up some extra income from a temporary or part-time job.
Often, however, that’s not enough to pay the bills. You’ll have to supplement your income with regular withdrawals from your savings and investments. These withdrawals amount to “homemade paychecks,” landing in your bank account just the way your working paychecks did. If you’re married, the paychecks have to cover the cost of two life spans as well as any emergency need for cash. What kind of standard of living can you afford? Will you have to keep working? And how do you stretch your savings to make the money last?
When I started asking those questions for myself, I looked around for information. There isn’t much. I found books and websites on how to invest but practically nothing on how to prudently parcel your money out. If you take too little from savings, you’re depriving yourself of some of the comforts that you worked for. If you take too much, you’ll go broke.
I did find plenty of bad advice from financial firms and their salespeople (a.k.a. “advisers,” “financial consultants,” and brokerage firm “vice presidents”). I was shocked when I looked at the menu of so-called “safe” and “guaranteed” investments we’re being offered. They’re loaded with hidden costs and risks. Maybe the firms are unscrupulous, maybe just careless. Either way, people like us—with savings that we need to both hoard and spend—are walking around with targets on our backs. We’re where the money is and, believe me, they’re coming for it, or trying to.
Fortunately, important and objective research is currently being done on ways of creating reliable incomes for life. I’ve spoken to the key players and gathered their findings here. What surprised me—really surprised me—is how simple a retirement income plan can be. So simple that you can manage the investments and withdrawals yourself. If you’d rather not, I found several new sources of high-level help at rock-bottom costs. You don’t have to pay big commissions and fees to get good advice.
I also learned a lot by talking with practically everyone I met about the retirement decisions they’re making for themselves. Often, they were leaving money on the table because they hadn’t heard about their alternatives. Social Security topped this list. I found people taking it at age 62—not because they had to but because it was there. They had no idea how much their monthly benefit would increase if they waited a few years to collect. If you’re married and each of you has a Social Security account, you can combine your benefits or adjust your claiming dates to collect even more.
Then there’s the question of what percentage of your retirement savings to put into stocks (or, rather, stock-owning mutual funds—the best bet for you and me). Some savers were so spooked by the near collapse of the financial system in 2007 and 2008 that they now invest only in bonds and insured certificates of deposit. But even if you can live on today’s low fixed-interest rates, what will that income be worth in purchasing power as the years go by?
There’s a lot of research linking the percentage you hold in stocks to the size of the sustainable income you can withdraw from your savings for life. Having read it, I’ve come to think of retirement as being split in half. For the first half—the near-term 10 years or so—holding safe or low-risk CDs or bond mutual funds makes a lot of sense. You need a reliable source of money in case stock prices decline. But to fund the second half of retirement—starting 10 or 12 years from now—you’ll need to own investments that grow. American and international business, as a whole, has succeeded wonderfully over time (with occasional hiccups). We can share in that growth without breaking a sweat by buying and holding just two or three well-diversified stock-owning mutual funds. When you do this, you’ll still be an “income investor.” Future capital gains create spendable income just as interest and dividends do.
For prudent cash withdrawals from your retirement savings, the standard advice has been to take 4 percent of the total in the first year and add an increment for inflation in each subsequent year. But 4 percent is too much if you own only bonds and CDs. And it’s perhaps too little when part of your money is invested for growth. You don’t have to make a wild guess about how much of your savings you can afford to spend. There are recipes. Who knew?
While working on this book I changed my mind about a few things. For example, I developed a new respect for immediate-pay annuities that convert a lump sum of savings into an income for life. They offer a higher monthly income than you can prudently withdraw from investments that you manage yourself. (Don’t confuse “immediate-pay” with the variable annuities that promise lifetime benefits. “Lifetime benefit” annuities are on my “no” list due to high costs and misleading sales. It’s all explained in Chapter 6.)
Another example—I learned a new use for reverse mortgages. These loans against home equity are often a poor deal for people in later age, especially for those who have almost run out of cash. But if you take the loan earlier, in the form of a credit line, you can use it to increase the size of your monthly income. The credit line grows every year, which gives you a nice hedge against potential inflation.
A homemade paycheck isn’t intended to cover everything. You need it only to fill the gap between your retirement expenses and your other sources of income, such as Social Security, pension, rents, part-time work, and whatever. Figuring out that gap is the entryway to retirement planning. Don’t feel bad if you have to trim your expenses so as not to take too much from your savings every year. Almost everybody trims whether they confess it or not. Peace of mind is finding a way of life that works.
Every personal situation is a little different. Some people focus their plans on retiring at a certain age—anywhere from 45 to “never.” Some get a buyout offer at 55 and wonder whether they can afford to take it. Some are pushed into retirement unexpectedly, through illness or job loss, and find that money is short. Some have retired already and need a clearer look (or a second opinion) on how to handle their money now. I’ve ranged over all the major financial questions I can think of, including health and life insurance. Inevitably, products and options will change in the future but, in my reporting, I sought general principles that will stand the test of time.
The biggest thing I learned, after digging into this subject for a couple of years, is the significance of our sense of self as we approach or enter this change of life. We need to find a new way of being—a fresh identity, different passions and pastimes, and a deeper involvement with family, community, and friends. We’re not on the shelf (yet!). We have lots to contribute and the time to find our place. What gives us this freedom of mind and action is having an income that we’re sure will last for life. This book was written to help you build it. After that, adventure calls.
Jane Bryant Quinn
New York City
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